Why is the APR on my Truth-in-Lending disclosure higher than the note rate?
Why is the APR on my Truth-in-Lending disclosure higher than the note rate?
The difference between the annual percentage rate (APR) and the note rate is very confusing especially for first time home buyers. Actually, even seasoned buyers have difficulty understanding the difference between the two numbers.
The interest rate is the rate a lender charges a borrower for use of money for a specific length of time. The interest rate, loan amount, and loan term determine your monthly payment. The APR does not affect your monthly payment.
The easiest way to understand the APR is to consider it as the “true cost of borrowing” as the Annual Percentage Rate incorporates not only the interest rate but also considers the other lender fees required to obtain financing. The following fees are generally included in the APR:
• Points –both discount and origination points
• Prepaid interest
• Mortgage Insurance Premiums
• Lender Fees (underwriting, processing, application fees)
As you can see, the inclusion of these fees will almost always make the APR higher than the actual interest rate on your loan. The government believed that the APR would provide consumers an additional tool in comparing lenders and mandated the inclusion of the APR in the Truth in Lending Act.
Getting the lowest interest rate may not always be the best idea. While one loan may offer a lower interest rate, higher loan fees could give it a higher APR than a similar loan with a higher interest rate but less costs associated with that loan.
The APR and the interest rate should both be used in comparing loans. Your loan professional will also be able to help you with other factors you should use in deciding on which loan is best suited for your individual needs.
I hope I helped you understand the difference in APR and interest rate. I would be happy to address any other questions or comments you may have. Leave a comment a question on this post or you can connect with me directly at Guaranty Trust Company’s Knoxville office 865-824-2778 or via e-mail aimee.macilveen@guarantytrust.com
Comments - 3
Hello Aimee,
You have explained this very well. I am a realtor and this is always a frequently asked question at CLOSING! Thank you
By Marsia Miller on 3 August 2011
Marsia,
Thank you for the compliment. I am glad the explanation was helpful.
By Aimee MacIlveen on 15 August 2011
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Hey Aimee! This is a great post, thanks for explaining!
By Jenny Williams on 12 July 2011